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Does the ‘Save Six Months of Salary for Emergencies’ Rule Still Apply?

It’s a good starting point — but nowadays, it’s way more nuanced than that

It’s a rule of thumb: You gotta have six months of salary on hand to handle whatever life throws at you — or rather, whatever life sneaks up and sucker punches and eye gouges you with.

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But is that really true? No matter how much you actually earn, that’s half a year of work. And anyway, 63 percent of Americans don’t even have enough money on hand to handle a $500 emergency. What about a single guy versus a guy who’s married with multiple kids? Is it still the same rule?

Alongside James Conole, a certified financial planner who’s part of the XY Planning Network, and who helps his clients set up emergency funds all the time, we tried to figure out some answers.

How the hell can people save if they don’t even have 500 bucks on hand?

“That’s exactly why people need emergency funds,” says Conole. “Typically, why people can’t afford that is they have no ability to live within their means. And they’re spending every last dollar that comes in.”

While that might be somewhat dismissive of the financial burdens many families currently face, it’s true that lots of people suck at saving money. By being a little better at it, more people could at least cover such a one-off bill — like their car breaking down, a hospital bill, a water heater exploding or breaking your favorite bong in self-defense. Shit happens, and when it does, you’ve gotta have some cash ready.

So how much do I need, really?

Take a look at your situation. How’s your job? Do you work for the government, are you a tenured teacher or do you have some kind of job with really strong stability? Or a marketable skill set that could land you another job right away if you lost yours? For you lucky people, Conole says you can err closer to three months or so. He acknowledges it’s sort of an arbitrary number, but it’s a good one to follow “because it’s not as if an emergency fund is only for you losing your job. If that was the case, people with stable jobs wouldn’t need any emergency fund.”

What if I don’t have a job like that?

If you don’t have that kind of stability, you’re better off saving closer to six months’ salary. But even that doesn’t apply to everyone: For people with irregular salaries — either in the gig economy, or as a freelance hack [author looks in mirror, grimaces] — Conole says to forget about your monthly income and focus instead on your expenses. Add up all your bills — rent/mortgage, utility bills, car payment, groceries, gas, all that — multiply by three, and that’s a good rule of thumb about where you should be.

Likewise, regular folks with regular jobs should also factor in their individual expenses as well. A single dude is generally on the hook for a lot less than a family dad is. Basically, be realistic about what you’ll need to spend money on if you might not be earning any for an extended period of time.

Where do I keep this emergency fund?

The whole goal of an emergency fund is to keep you from going into credit card debt, or having to pull money from your retirement account or your kids’ college fund. So Conole says to think of all your assets, savings, investments, things you’re working toward, etc. as your castle. The emergency fund is your moat, and the bigger your moat, the more problems it’ll keep out.

“If you have no emergency fund and something bad happens — when life attacks you, so to speak — you’re not going to have anything to protect your retirement accounts you saved up, or you’ll have to go into significant credit card debt, with really high interest,” says Conole. So start digging that moat, knave!

It’s its own little pile of money, correct?

Yes — don’t commingle this money with your nest egg, your kids’ college fund, your vacation money, none of that. Keep it separate! Also, it’s not a slush fund, so don’t spend this “emergency money” on a trip or on Christmas gifts. The best ways to save for those things is to open another account for them, advises Conole.

That’d be a lot of accounts.

That’s actually by design! More on that in a moment.

What’s a good type of account for an emergency fund?

You want something that you can access right away, and something that doesn’t penalize you for pulling money out early, so forget mutual funds or anything like that. Conole recommends breaking up your emergency money by putting a few thousand bucks in your normal savings account. For the rest, he recommends a separate, online, high-yield savings account — Barclays, Ally, Capital One, lots of banks offer them (though “high yield” is relative — they’ll likely offer less than 2 percent interest, but still, your money will at least be earning something).

Besides the growth, the other benefit of keeping this money separate is you’re essentially keeping it away from yourself. “When you log into your normal bank account and you don’t see it, it’s almost out-of-sight-out-of-mind,” says Conole. “When we see money, it’s easier to spend. But when it’s in a separate account, it’s almost like you forget it exists — and there’s less temptation to spend it.”

So the six-month rule is still… mostly right?

Yeah, go with the three-/six-month rule depending on your individual situation. Speaking of individual situations, if you’re the entrepreneurial or business-owner type, Conole finds that they often like to have 12 months’ worth of expenses saved up in the bank. It gives them a sense of control and allows them to take more risks (presumably healthy ones!) in their business, because there’ll be more for them to fall back on if they need it.

Really, a lot of it comes down to comfort. Some people want even more than a year’s worth because they just feel safer that way! For super savers, Conole says, “It’s a balancing act between how much you need to have, and at what point are you saving too much and sacrificing some opportunity costs of what you could be doing with that instead.”

So be rational: Think through what you might need based on your personal situation, your job security and some of the things that could go wrong in your life (and what they might cost) and go from there. No matter what you earn, you don’t want to go under just because some uninsured dingbat knocked your rear bumper off at the stoplight.